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Australia: 25bp Rate Cut to 4.1% (Consensus 4.1%) in Feb-25

• The RBA lowered the cash rate to 4.1% as inflation moderates faster than expected, with underlying inflation at 3.2% in the December quarter, supported by easing wage pressures and subdued private demand.
• Labour market tightness persists despite overall economic weakness, with the unemployment rate at 4%, sustained employment growth, and high unit labour costs posing potential inflationary risks.
• The outlook remains uncertain, with global risks including US trade tensions and geopolitical instability, while further rate cuts will depend on continued disinflation and stable labour market conditions.

Neutral Rates Are Shifting Sands

• Central banks provide vague and evolving estimates of neutral rates that are unreliable guides to policy decisions, although these estimates inform the perceived terminal rate.
• Resilient labour markets and persistent unit labour cost growth challenge the dovish view that policy rates are well above their neutral settings, urging caution.
• Neutral estimates gradually drift to explain the prevailing regime, which doesn’t prevent a pause in cuts or a return to rate hikes consistent with historical norms.

By Philip Rush

Australia: Cash Rate Held At 4.35% (Consensus 4.35%) in Dec-24

• The RBA held the cash rate at 4.35%, reflecting a cautious stance amid persistently high underlying inflation. This outcome is consistent with projections of meeting the 2.5% target by 2026.
• Domestic economic activity remains subdued, with weak GDP growth and constrained household consumption. Nonetheless, tight labour market conditions and weak productivity sustain inflationary pressures.
• Future rate decisions depend on inflation trends, labour market adjustments, and global economic developments. The Board emphasises data dependency to balance inflation control against employment stability.

Australia: Cash Rate Held At 4.35% (Consensus 4.35%) in Nov-24

• The RBA board kept the cash rate steady at 4.35% to sustain the restrictive stance needed to bring inflation down, aligning with projections of achieving target inflation by 2026.
• Persistently high underlying inflation and a resilient labour market suggest continued excess demand, reinforcing the cautious approach towards easing.
• Future rate decisions will depend on domestic inflation trends, labour market dynamics, and global economic developments, particularly the Fed and ECB policy moves.